Why Buying and Holding Stocks is Not a Good Strategy

There is an old saying that we learn from our mistakes. But if this is true, why do people continually make the same mistakes believing it will be different next time? It’s not unusual to see portfolios with losses on individual positions of between 50 and 90 per cent, especially in times when the market has had significant falls like the one we experienced in March of this year.

Is buying and holding stocks the best strategy to adopt?

Obviously, large losses on individual stocks can have an extremely negative impact on the overall performance of an investor’s portfolio. When I question investors why they continue to hold these stocks, invariably the argument is that these good stocks will rise back up to their previous value. But this raises two questions; firstly is the stock really a good stock and when will it rise back up to where it was?

When stocks fall heavily, inevitably the investor is attempting to ride out the market. However, is this really the best strategy, particularly when they are potentially losing capital and the opportunity to invest their funds in other assets that are rising? What is interesting is that investors will happily ride out a losing stock, rather than liquidate it, for fear of losing, while they will gladly sell winning stocks too early for fear of losing the profit they have already made.

Telstra is a perfect example of why the old adage of ‘buy and hold’ is an inefficient strategy and why investors would have been better off selling their shares rather than holding. By November 2010, Telstra had fallen from its high of $9.20 setback in February 1999 for nearly 12 years into a low of $2.55. It then rose up to $6.74 by February 2015 only to fall back down to $2.60 by June 2018. Yet people continued to hold onto Telstra in the hope it would get back to its previous highs.

This week I reviewed the top 20 stocks in regards to how often they closed higher than they opened for the year. And yes, you guessed right, Telstra was not good on that front, as it only closed higher than it opened for the year 50 per cent of the time. If we look at the last six years, Telstra has closed lower than it opened in five of those years, yet people held onto it in the hope of making money. Remember, the goal to investing wisely is to preserve capital, as this in itself would improve the portfolio performance of the majority of Australians holding stocks, which is very achievable if you simply apply an exit strategy, as I outline in my award-winning book, Accelerate Your Wealth.

What were the best and worst performing sectors last week?

In contrast to the past few weeks, the market was a little more consistent last week with Information Technology taking the lead as the best sector, as it was up over7 per cent. Communication Services was also up nearly 6 per cent, while Consumer Staples rose over just over 4 per cent for the week. The worst performing sectors included Industrials up 1.03 per cent for the week followed by Utilities up 1.22 per cent and Materials up 1.68 per cent

Looking at the ASX top 100 stocks the best performers included Evolution Mining up over 12 per cent, A2 Milk up 8.54 per cent and Magellan Financial Group and Cochlear up 7.60 and 7.56 per cent respectively.

The worst performers for the week included Adbri Limited, which was down 26.10 per cent after losing its long-standing supply deal with Alcoa. After 50 years, Alcoa will not renew the contract from June 2021. Reliance Worldwide was also down 6.21 per cent and IOOF Holdings was down 4.2 per cent.

What's next for the Australian share market?

While the market traded lower last Monday than it did the week before, it traded up for the remainder of week to close up 2.53 per cent on the previous week. As the market rose steadily from Tuesday to Friday of last week, it increased the chances that the recent down move may be ending.

There has been a tug of war over the past month between the bulls and bears with no side really dominating and, as such, the market has lacked a clear direction. While it is still too early to tell if the bulls are taking back control or whether this may be a false rally, we need to see the market trade above the high of 6,314 points set on 9 June to confirm the market is bullish.

The US market was closed on Friday for 4th of July celebrations and while technically the market closed higher than it did the prior day, in a sign of weakness it closed lower than it opened. Therefore, I expect the All Ordinaries Index will be a little subdued until Tuesday when we see how the Dow Jones traded after the long weekend. Right now, I recommend staying patient until the high of 6,314 points is broken, as there is still a probability the market could turn to fall away.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.